From: Warren Mosler
Date: June 25, 2010 7:13:52 AM EDT
Subject: *EU Daily- The EU is on a financially sustainable path
Still looks like the strategy for Europe could be functionally very close to my proposal, and fiscally sustainable if they
continue on the current path.
This is just inference on my part- I have no information other than what I’ve read online.
The ‘distributions’ the ECB will make will be via buying enough national govt debt in the secondary markets to keep the national govs solvent and able to fund their deficits, at least in the short term markets.
If they determine any member nation is not complying to their liking, they will start threatening to stop buying their debt, thereby isolating them from the ECB credit umbrella, while allowing the remaining nations to remain solvent.
ECB spending on anything is not (operationally) revenue constrained as the member nations are, so this policy is nominally sustainable.
The austerity measures will result in lower growth, and maybe even negative growth, but the solvency issue is gone as long as this policy is followed.
With currency strength and inflation ultimately a function of fiscal balance, the fundamental forces in place that drove the euro to 1.60 vs the dollar remain in place, while the mechanism to remove the default risk that drove the portfolio shifts that weakened the euro is in place.
While restructuring risk remains, it need not be forced by solvency risk. So restructuring need not happen.
Power has shifted to the ECB, presumably under substantial influence of the national govt finance ministers, as the ECB directly or indirectly moves to fund the entire banking system and national govt. deficits.
This is an institutional structure that is fully sustainable financially, with the economic outcome a function the size of the national govt. deficits they allow.
The conflict will remain the money interests in Europe who put currency strength as a priority, vs the exporters who favor currency weakness.
The consensus will be that unions and wages in general must be controlled.
Again, I do not know for sure that the ECB is actually moving in this direction.
They may not be.
Watch closely to see if the buying of national govt. securities remains sufficient to keep the national govts solvent.